Aug. 4 (Bloomberg) -- Polish government bonds fell at the
fastest pace in six months as speculation the economy needs
fresh monetary stimulus is overshadowed by concern over the
timing of U.S. interest-rate increases.

The yield on 10-year government debt surged 30 basis points
in the final three days of last week, the biggest jump since
January, according to data compiled by Bloomberg. The rate
dropped eight basis points to 3.40 percent by 1:15 p.m. in
Warsaw. The premium investors demand to hold the bonds instead
of equivalent German bunds narrowed, after widening last week to
the most since May.

The economy is starting to waver amid the first contraction
in manufacturing in more than a year. Russian President Vladimir
Putin also banned Polish fruit and vegetable imports, including
apples and cabbage, in response to European Union sanctions.
While the headwinds have fueled speculation policy makers will
cut borrowing costs, attention has shifted to when the Federal
Reserve will raise rates.

“The market is getting nervous on stronger U.S. growth
numbers since it moves forward the first Fed hikes,” Lars Peter
Nielsen, a fund manager at Kolding, Denmark-based Global
Evolution AS, which oversees about $2.2 billion, said by e-mail
on Aug. 1. “In the short-term, global factors are definitely
weighing” on the bond market, he said.

Fed Timetable

U.S. policy makers last week reduced monthly asset
purchases by $10 billion to $25 billion, leaving them on pace to
end in October. They repeated they’re likely to keep rates low
for a “considerable time” after stimulus ends.

Poland’s purchasing managers’ index declined to 49.4 in
July from 50.3 in June, Markit Economics Ltd. said Aug. 1,
missing the 50.5 median estimate of 14 economists surveyed by
Bloomberg. A reading below 50 indicates contraction. The PMI
data followed reports on June industrial output, wage growth and
retail sales that also trailed behind forecasts.

“The weaker-than-expected PMI should be theoretically
positive for bonds, but external factors have been the key
driver for the local bond market,” Esther Law, who helps
oversee the equivalent of $249 billion as a fund manager at
Pioneer Global Investments Ltd. in London, said by e-mail on
Aug. 1.

Shorter-maturity bonds are less “vulnerable to further
repricing” than longer-dated securities “should U.S. monetary
policy start to normalize in the medium term,” Law said.

Damping Growth

EU governments agreed last week to bar Russia’s state-owned
banks from selling shares or bonds in Europe and restrict
exports including oil industry equipment. Russia’s ban affects a
market worth about 1 billion euros ($1.3 billion) a year,
according to Polish government data.

The sanctions will damp Poland’s economic growth by 0.6
percentage point in 2014, Deputy Prime Minister Janusz
Piechocinski told newspaper Rzeczpospolita on Aug. 1. The
expansion is seen at 3.6 percent this year and next, according
to the central bank’s projection published in July, when policy
makers kept their main rate at a record low 2.5 percent.

The bond market may be “supported” by Russia’s ban, which
will boost “deflation pressure and increase the likelihood of
even a 50 basis-point rate cut,” Pawel Radwanski, an economist
at Bank BGZ in Warsaw, said in a note July 31.

The extra yield on Poland’s 10-year bonds over similar-maturity German bonds fell to 227 basis points today after
rising to 234 last week, the most since May 21. The zloty
advanced 0.3 percent to 4.1732 against the euro.

“We don’t think that the recent pullback is anything but a
sensible correction,” Paul McNamara, a fund manager who
oversees $6.5 billion in emerging-market debt at GAM U.K. Ltd.
in London, said by e-mail Aug 1. “The U.S. gross domestic
product and the Fed” are the main drivers for bonds, he said.